Ozinsky NO v Lloyd and Others

• Jurisdiction: South Africa
• Judge: Joubert JA, E M Grosskopf JA, Nestadt JA, Nienaber JA and Howie JA
• Judgment Date: 29 March 1995
• Docket Number: 283/92
• Court: Appellate Division
• Hearing Date: 15 February 1995
• Citation: 1995 (2) SA 915 (A)

Nienaber JA:

The appellant is the liquidator of a company, Hi-Class A Kitchens (Atlantis) (Pty) Ltd (to which I shall refer as 'Atlantis'). He was the plaintiff in the Court below. I shall continue to refer to him as such. The three respondents in the appeal (henceforth referred to as 'the defendants') were directors of Atlantis and of its sister company, Hi-Class Kitchens (Pty) Ltd ('Kitchens'). Atlantis's business consisted B of the design, manufacture and installation of household kitchen cupboards and fittings of high quality. Kitchens was responsible for the marketing of the products. Both companies were liquidated at the instance of the Lloyd Family Trust (which was controlled by the first and third defendants), provisionally on 5 December 1986 and finally on 25 February C 1987. This was a stratagem to pre-empt an application for liquidation by one of Atlantis's main trade creditors, PG Wood Ltd ('PG Wood'). PG Wood is the catalyst for and the promoter of the present litigation. In it the plaintiff, on the instructions of the creditors, seeks an order in terms of s 424(1) of the Companies Act 61 of 1973 declaring the three defendants personally liable 'for all or any part of the debts or other liabilities D of the company to an amount of R226 188,40'. This is the amount, broadly speaking, by which Atlantis's liabilities exceeded its assets at the time of liquidation. (The litigation relates solely to Atlantis; the plaintiff was not the liquidator of Kitchens and PG Wood was not its creditor.) The action was heard by Van Deventer J in the Cape Provincial Division. It E failed. The judgment is reported sn Ozinsky NO v Lloyd and Others 1992 (3) SA 396 (C). I shall refer to it as 'the reported judgment'. This is an appeal, with leave from the Court a quo, against the refusal of the relief sought by the plaintiff.

Section 424(1) of Act 61 of 1973 reads as follows:

F 'When it appears, whether it be in a winding-up, judicial management or otherwise, that any business of the company was or is being carried on recklessly or with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court may, on the application of the Master, the liquidator, the judicial manager, any creditor or member or contributory of the company, declare that any person who was knowingly a party to the carrying on of the business in the manner G aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct.'

There are two parts to the body of this section: (1) the business of the company must be carried on in a certain manner, ie (i) recklessly or (ii) with intent to defraud creditors (of the company or of any other person) H or (iii) for any fraudulent purpose; and (2) the person concerned must (a) be a party to the carrying on of the business (cf Howard v Herrigel and Another NNO 1991 (2) SA 660 (A) at 674G-I) and (b) have knowledge of the facts from which the conclusion is properly to be drawn that the business of the company was or is being carried on (i) recklessly or (ii) with intent to defraud creditors (of the company or of any other person) or I (iii) for any fraudulent purpose (Howard v Herrigel and Another (supra at 673I-J).

The case on the pleadings was that all three defendants were parties to the carrying on of the business of the company either recklessly or with intent to defraud creditors of the company and that all three did so with J knowledge that the affairs of the company were being conducted in that

Nienaber JA

A fashion. The pleadings are summarised in the reported judgment at 398H-399H. The gist is that the defendants, knowing that Atlantis was trading in insolvent circumstances, (a) permitted it to incur debts when there was no reasonable prospect of payments being made when due, alternatively, (b) adopted a policy towards the payment of the company's debts which was grossly unreasonable and prejudicial to the company and B its debtors, and/or (c) deceived creditors into believing that the company had cash flow problems (in order to induce them to extend credit to the company which, on liquidation, became irrecoverable) when the company in fact experienced no such problems.

Nienaber JA It was common cause during the trial that the defendants, C after 1 March 1986, knew that Atlantis's liabilities exceeded its assets and that they nevertheless permitted the company to incur further debts, such as those of PG Wood and Designaire (Pty) Ltd ('Designaire'), eventually totalling R24 837,78 and R15 530,33 respectively; that the defendants, at the time when such debts were incurred, did not advise the D creditors concerned that the company's liabilities exceeded its assets; and that PG Wood and Designaire were told by the second defendant that the company experienced cash flow problems.

On the strength of a series of judgments delivered by Stegmann J those facts, in themselves, may well have rendered the defendants liable in terms of the section. Those cases are: Ex parte Lebowa Development E Corporation Ltd 1989 (3) SA 71 (T); Singer NO v M J Greeff Electrical Contractors (Pty) Ltd 1990 (1) SA 530 (W); Ex parte De Villiers NO: In re M S L Publications (Pty) Ltd (in Liquidation) 1990 (4) SA 59 (W); Ex parte De Villiers and Another NNO: In re Carbon Developments (Pty) Ltd (in Liquidation) 1992 (2) SA 95 (W).

F The Court a quo disagreed with the premises of law expressed in the above cases, viz that trading by a company in insolvent circumstances except on a cash basis is per se dishonest and unlawful; and that directors of a company of which the liabilities exceed the assets are under a general duty to disclose its de facto insolvency to a seller before accepting goods on credit (at 417B-E and 419C-F). The views thus expressed by the G Court a quo were vindicated by a subsequently delivered judgment of this Court, Ex parte De Villiers and Another NNO: In re Carbon Developments (Pty) Ltd (in Liquidation) 1993 (1) SA 493 (A), which, by disagreeing with Stegmann J (at 503C-504F), settled these points either expressly or by implication.

On the factual issue, viz the state of mind of the defendants, the Court a H quo found that their actions were neither reckless nor fraudulent. The first defendant, so it was found,

'remained determined to the end to make a success of the business and . . . intended to invest and would have invested all the capital that the business might have required to pay its current trade creditors up to the date of liquidation'

(at 411F-G) and,

I 'never even contemplated the possibility of liquidation. She had full confidence in the viability of the business and remained determined to provide all the capital that might be required to make it a successful venture.'

(At 411I-J.) The second defendant, according to the Court a quo, had absolute faith in the first defendant's determination and financial resources and there was no reason to believe, so it was held, that he ever J had 'the

Nienaber JA

A slightest doubt that the company's creditors would be paid' (at 412A-B). The third defendant, so the Court a quo found on the probabilities, likewise had faith in the first defendant's resources. His view of the future of the company would not have differed materially from that of the second defendant (at 412D). At 407B-C the Court said:

B 'The third defendant did not testify, but no issue was made of this and it was accepted by Mr Nelson (for...